7 Rules of Stock investing

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source: http://www.h-l.co.uk/

I know I have mentioned this rules already but I want to reiterate it for the benefit of new stock investors in the Philippines.

Again these rules are our personal rules me and a bunch of my stock investor friends keep on reminding ourselves in our quest to be financially free. I hope these will also benefit you as you step into this vehicle or means of achieving financial freedom.

1. Only free cash

Most people believed that only the rich with tons of money can invest in the stock market. In reality you only need a minimum of 5,000.00 pesos to invest in the Philippine Stock Market using an online stockbroker. Now we only say invest only your free cash because it would be miserable to pull out what you have invested when the need for cash arises. And the worse is when you pull out your investments the stocks you are holding have a market price below your average cost thus ending at a loss. 

2. Don't be ashamed to ask

In the stock market information plays a big part. Knowing what is a stock, what is the companies current situation, what is the trend, what is the entry point and the likes. As you ask you must be able to acquire knowledge which you can use to guide you as you do your stock investing activities. Learn from your mistakes and research or analyze why you did not get your stock purchase or why is the stock at a low level.

3. Pocket your profits, moderate your greed

No one can really tell when will the stock market will go up or down. Thus one has to set until where you are willing to accept profit so that when the stock price reaches that level you sell your stock and keep the profit. Most of the time people keep on waiting and waiting for the stock to be high and when the stock price suddenly drops they wont be able to sell their stock at the desired price thus ending selling their stock at lower profit or worst at a loss because the stock went down abruptly.

4. When in doubt don't buy


Always do your due diligence or research before buying. Don't buy because your neighbor says so. Always research about the stock you wanted to purchase. In relation to this don't be afraid to ask people who knew and also invest in stock. Most people ask opinion from people who are not investing thus they make wrong stock picks. Educate yourself. In the very first part it would be very hard since everything to you is new. The terms will make your nose bleed and your brain freeze and you might think you are talking to an alien who have advanced intelligence when you talk to someone who has been successful in investing. They are the mentors and though they themselves are mentors they too do research. So when doubtful about a stock that you want to purchase do your research first before  buying.


5. Set aside emergency fund for personal use and another for bargain buying


Again in relation to put only free cash in stock investment, one has to set aside emergency fund to avoid pulling out your investment at a loss. Also set aside free cash for bargain hunting. Often times the market goes into what we call a healthy correction. When this comes prices go down to correct itself from being saturated. This is the best time to buy specially blue chips since most will have a lower price due to saturation. Those who own the stock before are now selling thus in order to sell they have to lower their asking price. It is also the best time to cost average for the stocks that you have been holding.


6. Trade at your own risk


Again as we said nobody can say when will the stock go up or down thus you should be accountable for your own stock bids and not blame somebody else when you make bad buys. You might buy a stock today and it could be possible that the next day the stock will be down and the other day and still the next week. Even if a mentor or a person with a good track record at stock investing said so and you relied on his word you should not put the blame on them when you made a bad stock buy. It could be that they are in a different but advantageous position thus they are able to make profit out of it and you on the other hand loss.


7. Share your blessings


Always set part of your blessings to give back to charity. Giving makes that sense of abundance because you can give a portion of what you earn. When you think abundance it creates that feeling of fulfillment and it would make you feel not limited thus you also make your bids as if you are a millionaire and big time investor.

 

Stock trading vs. Stock investing

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 source: http://www.oasisllc.net

This issue has been lingering for sometime. Let me cast my thoughts on it and hoping it would clear some gray areas regarding the two. But first let's define them to established basis.

Stock trading/Momentum investing(from http://www.investorwords.com)

Buying and selling securities or commodities on a short-term basis, hoping to make quick profits.

Stock investing/Value investing(from http://www.investopedia.com)

The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.

The main difference of the two primarily lies on the strategy in achieving profitability. Trading is the act of buying and selling for quick profit while investing is more of positioning or buying at low prices and waiting for the stock to appreciate to profit.

In stock trading one watches particularly the stock's price changes against participants reaction to current trend. Price trends may be influence by current news within the company or in the Global or regional market in general. 

News like the entry of MVP(Manny V. Pangilinan) of TEL to PX(Philex Mining) and LC(Lepanto Consolidated Mining) raised their stock prices coupled by the bullish PSE market. I remember profiting 35% at my LC within two days of trading. A sudden change or better than expected performance of a company may also influence  its stock price. When the price of a stock is gaining momentum most investors suddenly buy that stock creating more price uptrend thus a surge of stock price in short period which may led the stock to be overbought and will suddenly drop when sellers are more than buyers...

Stock investing on the other hand primarily is about making the cost of the stock lower thus the concept of cost averaging come into the picture. Besides cost averaging investors look for companies with intrinsic value. Companies with long term potential but are currently undervalued are said to be one of the stocks with intrinsic value. The concept of intrinsic value was started by Warren Buffet. With this concept one must be patient enough to realize the expected value which mostly comes after 1 - 3 years or more.

Companies become better over time and as the company grows its value also grows. Fundamentally sound companies are one of the companies that one may consider as companies of value. These
companies may be one of the blue chips or maybe a small company that recently started but was able to withstand various financial crisis.

What now then is the best strategy when one enters the stock market?

The answer to this question depends on one's risk appetite.

Traders are seen as risk takers. Some may term them short term thus the terminology "going short" and other call them tsupitero or tsupitera. A common trait of a trader is establishing a comfort zone when trading and they ride the sudden uptrends and buying speculative stocks. Most establish a loss percentage of 5% meaning they sell their stocks if such is on or near the acceptable 5% loss level in order to invest their funds to a far better profit generating stocks. There is nothing bad with this idea since one enters the stock market to profit...only that this strategy is risky.

Investors or Value investors on the other hand has the patience to wait for that big price uptrend. They buy fundamentally sound stocks when they are or near floor prices. These people are happy when stock prices are falling(you might think their crazy) and they would always look for bargain. As time passes they accumulate and
make sure that the cost per share goes down as they buy more of the stock and when the stock price rises to up to 25 -50% that is the time they will release. It usually takes 6 months to 2 years or more thus patience is a key ingredient in value investing. At the same time one must be diligent enough to do research and analysis of the company before buying. 

The best way is to be both. One should establish a strategy to purchase some stocks for short term/profit taking  and establish some stocks to be for long term. To be able to fund one's long term goals one must have a continues source of funds which could come from short term trades.

Again rules to follow are the following:

1. Don't be greedy, moderate your greed when price of the stock is 

    near or on its TP(target price) sell and take profits

2. Research and investigate, when in doubt don't buy, trade at your 

    own risk

3. Cost-average

4. Always set aside emergency funds, always leave some free cash 

    for bargain buying

5. Only and only invest free cash